‘India is the most attractive emerging market in the world'
The FY16 Union Budget, a much awaited event, laid down a roadmap for economy,
having delivered against the backdrop of high expectations.
The government has done well to reiterate the fiscal consolidation roadmap, visibility on the capital expenditure (capex) cycle and thrust on infrastructure. One highlight is that the road map to implement the Goods and Service Tax (GST) has been laid down.
It has increased tax deductibles for individuals. The government has also come out with a system to monetise household gold holdings thus allowing for productive use of gold. It seeks to widen the social safety net, which all in all, will strengthen and aid India's economic rise.
While the boost towards the capex cycle is not really substantial, it is clearly a good start given the current economic situation.
Currently, India is in the early stages of an economic recovery. The current account
deficit (CAD) is under control, wholesale inflation is negative, and interest rate cut cycle has only just begun. So there is a huge scope for the long-term investor as the economy expands and gross domestic product (GDP ) growth recovers. A lower oil price and lower CAD bodes well and saves considerable amounts for the government.
As for the global scenario, one of the most widely talked about expectations for the current year is the rate hike in US, and currency headwinds taking place globally. It may be difficult for the US to have a higher interest rate environment, while the rest of the developed world is conducting some form of quantitative easing (QE) or another. Europe is on a bond buying spree, and so is Japan.
This scenario itself is tantamount to tightening in the US. However, if the US does raise interest rates this year due to a strong economy, it will definitely impact global
markets. Equity markets are pricing a low or zero interest rate environment. A rate hike in the US will mean equity assets will get re-priced which will give opportunities across equity assets. With the current price of crude and good growth prospects, India is the most attractive emerging market in the world. Equities albeit not cheap, continue to remain a good long term investment destination. The outlook for equity markets is very positive for the next 3-5 years. In the short run, we have seen a decent uptick in the market, complemented by a positive rate cut from the Reserve Bank of India (RBI).
On the flipside, global headwinds coming from Europe and US combined with richer domestic valuations should keep optimism in check. In fact, it will be suitable to have
a subdued market rally this year because after two good years in the market, investors
tend to get exuberant and invest with hopes that the markets give 30 percent returns every year.
No one can really predict the market. Investors shouldn't get swayed by the past returns of the market. Therefore, a sideways movement is good for the market. For the rest of
2015 we expect continued volatility with decent upticks and a few downdrafts based on domestic and global news flow. From a valuation perspective, any consolidation is healthy for the markets and beneficial to prevent high investor expectations.
Broader market valuations will look quite high with earnings multiple ranging about 20 times. But the fact is we are talking about specific stocks. There are pockets where valuations are expensive, and others that are not-so-expensive, among them are the rate-sensitive sectors.
Second, there's a risk of crude prices spiking back to $90 or $100 per barrel because we benefit immensely out of crude falling as an economy. Besides, that there would be external risks if something happens in Venezuela or Greece, markets would react. It will make equity prices gyrate significantly. But, in my view, it's more of an opportunity, than a risk.
India's macro fundamentals like CAD, inflation, lower crude prices and growth impulses are improving. Further, in this Budget, there is a clear thrust on infrastructure which is a step towards recovery. It's the only way the wheels of the economy can start running comfortably again. This could benefit certain sectors in the infrastructure space . Cascading benefits could boost demand aiding the domestic cyclical sectors. As the investment cycle picks up, these sectors will further gain strength. All this should result in earnings expansion over 3-5 years.
In the first part, we look at the stocks which have performed badly. We also figure out why institutional investors are underinvested and why external analysts have degraded that particular stock - this is the starting point for us. Similarly, we also look at stocks which have done well and why institutional investors are overweight, and why analysts have put 'BUY' for that particular stock.
In both the scenarios, we try to make a case to move out of a set of stocks, which have done well, to stocks which have done badly. In the next part, we try to find out why people are negative on that stock, meet the management of the company and do our own internal research. But that is not enough; when we are using value investing, we figure out whether that stock can improve from the current situation. We meet the
companies and sector analysts among all the brokerages.
After going through all the annual reports, participating in conference calls, we look at
where the stock is placed in a cycle and then decide whether the stock should be bought or not.
So it's a combination of cycles, sector, industry and company valuations - all these factors are considered before including the stock in the portfolio. A combinat ion of under investment and valuations gives us the best value investment.
We believe in a concept of relative value. In 2007, we found significant value in consumer, pharmaceutical and technology. Therefore, at any point of time, we will be able to find value in something at least relative to the rest. In our opinion, given the way markets have got integrated, there is lot of scope to find value at all points of time. What is required is the intrinsic approach to buy value while others don't like it; in first place, it becomes value because others don't like it.
Where do you think interest rates will be one year from now?
A: Towards the end of the year, we believe interest rates may be substantially lower in order to aid the economic expansion.
Post-budget, which sectors would you now look to add to your portfolio and which ones could see a miss?
In such an environment, one segment that is likely to do well is clearly the highly leveraged segment. A fifty-basis point cut, once passed through to the broader economy, will reduce the interest burden of leveraged companies. Many highly leveraged companies did badly relative to the rest of the market, and some of them
are well-poised to make the most of the lower interest rate cycle.
Debt ridden companies may not necessarily have the best financials or the best balance sheets hence, it requires intensive research to narrow down to specific companies. Financials is another area that looks quite promising. Public sector banks require capital and over time with lower interest rates should benefit banks as it will improve growth and reduced non-performing assets (NPAs). A combination of lower interest rates, lower NPAs, and capital infusion are extremely positive for the financial sector.
Also, with visibility on capex revival through increased government spending and
addressing issues of financing infrastructure projects could benefit certain sectors in the infrastructure space.
Not adhering to asset allocation model is one of the biggest mistakes that keeps investors from reaching their financial goals. Building a portfolio based on the suitable asset al location, instills discipline in investing, helps avoid the tendency to invest at market tops and redeem at market bottoms.
If investors are underinvested in equities, they may look to invest lump sum in equity strategies which are defensive (or have cash) as equity markets have run up and if the markets offer opportunities over the course of next few months or one year, these strategies will have enough cash to buy equities. It may be a prudent strategy, thus, to add flavour of funds in the balanced advantage and dynamic asset allocation category. These funds seek to increase allocation to equity when the markets are cheap, and book profits in equities when markets are rising thereby reducing volatility and boosting returns.
However, if an investor is well invested in equities, we would recommend investing this amount in a staggered manner through equity mutual funds over the course of next 6-9 months. With the current price of crude and good growth prospects, India is the most attractive emerging market in the world and therefore, it is an opportunity for people to invest for the long-term in Indian equities.
The outlook for equity markets is very positive for the next 3-5 years.
Happy Investing
The FY16 Union Budget, a much awaited event, laid down a roadmap for economy,
having delivered against the backdrop of high expectations.
The government has done well to reiterate the fiscal consolidation roadmap, visibility on the capital expenditure (capex) cycle and thrust on infrastructure. One highlight is that the road map to implement the Goods and Service Tax (GST) has been laid down.
It has increased tax deductibles for individuals. The government has also come out with a system to monetise household gold holdings thus allowing for productive use of gold. It seeks to widen the social safety net, which all in all, will strengthen and aid India's economic rise.
While the boost towards the capex cycle is not really substantial, it is clearly a good start given the current economic situation.
Currently, India is in the early stages of an economic recovery. The current account
deficit (CAD) is under control, wholesale inflation is negative, and interest rate cut cycle has only just begun. So there is a huge scope for the long-term investor as the economy expands and gross domestic product (GDP ) growth recovers. A lower oil price and lower CAD bodes well and saves considerable amounts for the government.
As for the global scenario, one of the most widely talked about expectations for the current year is the rate hike in US, and currency headwinds taking place globally. It may be difficult for the US to have a higher interest rate environment, while the rest of the developed world is conducting some form of quantitative easing (QE) or another. Europe is on a bond buying spree, and so is Japan.
This scenario itself is tantamount to tightening in the US. However, if the US does raise interest rates this year due to a strong economy, it will definitely impact global
markets. Equity markets are pricing a low or zero interest rate environment. A rate hike in the US will mean equity assets will get re-priced which will give opportunities across equity assets. With the current price of crude and good growth prospects, India is the most attractive emerging market in the world. Equities albeit not cheap, continue to remain a good long term investment destination. The outlook for equity markets is very positive for the next 3-5 years. In the short run, we have seen a decent uptick in the market, complemented by a positive rate cut from the Reserve Bank of India (RBI).
On the flipside, global headwinds coming from Europe and US combined with richer domestic valuations should keep optimism in check. In fact, it will be suitable to have
a subdued market rally this year because after two good years in the market, investors
tend to get exuberant and invest with hopes that the markets give 30 percent returns every year.
No one can really predict the market. Investors shouldn't get swayed by the past returns of the market. Therefore, a sideways movement is good for the market. For the rest of
2015 we expect continued volatility with decent upticks and a few downdrafts based on domestic and global news flow. From a valuation perspective, any consolidation is healthy for the markets and beneficial to prevent high investor expectations.
Broader market valuations will look quite high with earnings multiple ranging about 20 times. But the fact is we are talking about specific stocks. There are pockets where valuations are expensive, and others that are not-so-expensive, among them are the rate-sensitive sectors.
Second, there's a risk of crude prices spiking back to $90 or $100 per barrel because we benefit immensely out of crude falling as an economy. Besides, that there would be external risks if something happens in Venezuela or Greece, markets would react. It will make equity prices gyrate significantly. But, in my view, it's more of an opportunity, than a risk.
India's macro fundamentals like CAD, inflation, lower crude prices and growth impulses are improving. Further, in this Budget, there is a clear thrust on infrastructure which is a step towards recovery. It's the only way the wheels of the economy can start running comfortably again. This could benefit certain sectors in the infrastructure space . Cascading benefits could boost demand aiding the domestic cyclical sectors. As the investment cycle picks up, these sectors will further gain strength. All this should result in earnings expansion over 3-5 years.
In the first part, we look at the stocks which have performed badly. We also figure out why institutional investors are underinvested and why external analysts have degraded that particular stock - this is the starting point for us. Similarly, we also look at stocks which have done well and why institutional investors are overweight, and why analysts have put 'BUY' for that particular stock.
In both the scenarios, we try to make a case to move out of a set of stocks, which have done well, to stocks which have done badly. In the next part, we try to find out why people are negative on that stock, meet the management of the company and do our own internal research. But that is not enough; when we are using value investing, we figure out whether that stock can improve from the current situation. We meet the
companies and sector analysts among all the brokerages.
After going through all the annual reports, participating in conference calls, we look at
where the stock is placed in a cycle and then decide whether the stock should be bought or not.
So it's a combination of cycles, sector, industry and company valuations - all these factors are considered before including the stock in the portfolio. A combinat ion of under investment and valuations gives us the best value investment.
We believe in a concept of relative value. In 2007, we found significant value in consumer, pharmaceutical and technology. Therefore, at any point of time, we will be able to find value in something at least relative to the rest. In our opinion, given the way markets have got integrated, there is lot of scope to find value at all points of time. What is required is the intrinsic approach to buy value while others don't like it; in first place, it becomes value because others don't like it.
Where do you think interest rates will be one year from now?
A: Towards the end of the year, we believe interest rates may be substantially lower in order to aid the economic expansion.
Post-budget, which sectors would you now look to add to your portfolio and which ones could see a miss?
In such an environment, one segment that is likely to do well is clearly the highly leveraged segment. A fifty-basis point cut, once passed through to the broader economy, will reduce the interest burden of leveraged companies. Many highly leveraged companies did badly relative to the rest of the market, and some of them
are well-poised to make the most of the lower interest rate cycle.
Debt ridden companies may not necessarily have the best financials or the best balance sheets hence, it requires intensive research to narrow down to specific companies. Financials is another area that looks quite promising. Public sector banks require capital and over time with lower interest rates should benefit banks as it will improve growth and reduced non-performing assets (NPAs). A combination of lower interest rates, lower NPAs, and capital infusion are extremely positive for the financial sector.
Also, with visibility on capex revival through increased government spending and
addressing issues of financing infrastructure projects could benefit certain sectors in the infrastructure space.
Not adhering to asset allocation model is one of the biggest mistakes that keeps investors from reaching their financial goals. Building a portfolio based on the suitable asset al location, instills discipline in investing, helps avoid the tendency to invest at market tops and redeem at market bottoms.
If investors are underinvested in equities, they may look to invest lump sum in equity strategies which are defensive (or have cash) as equity markets have run up and if the markets offer opportunities over the course of next few months or one year, these strategies will have enough cash to buy equities. It may be a prudent strategy, thus, to add flavour of funds in the balanced advantage and dynamic asset allocation category. These funds seek to increase allocation to equity when the markets are cheap, and book profits in equities when markets are rising thereby reducing volatility and boosting returns.
However, if an investor is well invested in equities, we would recommend investing this amount in a staggered manner through equity mutual funds over the course of next 6-9 months. With the current price of crude and good growth prospects, India is the most attractive emerging market in the world and therefore, it is an opportunity for people to invest for the long-term in Indian equities.
The outlook for equity markets is very positive for the next 3-5 years.
Happy Investing
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